Foreign investors are increasing their presence in China’s distressed debt market and the timing for them couldn’t be better as tight funding conditions onshore keep local buyers at bay.
International buyers purchased at least 12 non-performing loan portfolios this year, up from nine last year, according to a report by PricewaterhouseCoopers. Special situation funds from Oaktree Capital Group LLC and Bain Capital Credit have boosted activities in sourcing deals while DAC Financial Management, a foreign-owned NPL service provider in China, counts this quarter as the one of the busiest it has had.
Global distressed-debt specialists are stepping up their dealmaking in China after a decade, betting that the country is becoming serious about developing a market to tackle its $256 billion of official non-performing loans (NPLs).
Groups such as Blackstone Group LP (BX.N) and Bain Capital Credit LP made their first investments in recent months, amid surging write-offs by banks and indications that China’s commercial bad loans market is set to deepen.
China Datang Corp. and Baoding Tianwei Yingli New Energy Resources Co. are among Chinese companies showing signs of financial stress that face $12 billion of bond payments this year.
The number of publicly traded firms based in China with net losses, falling revenue and net debt more than 150 percent of equity jumped to 49 as of Dec. 31 from 38 a year earlier, according to data compiled by Bloomberg. Tianwei Yingli, with notes due in October, is among the riskiest borrowers, according to China International Capital Corp.
With private debt growing as an asset class, China should come to the fore for intelligent investors. The continued progression of China’s economy, coupled with the increasing levels of distressed assets, makes China critical for credit investors to consider. Opportunities abound, ranging from non-performing loans (NPLs), bridge financing, credit enhancement products, high-yield loans, and other structured credits.
China’s reliance on the credit markets has resulted in one of the world’s largest debt burdens, totalling more than 280 percent of GDP, where corporate debt accounts for 125 percent. While the majority of commercial debt has been extended through official state channels, estimates suggest that the lightly-regulated $6.5 trillion shadow banking industry is responsible for over 35 percent of the $14 trillion in commercial loans.
The People’s Bank of China’s first benchmark interest rate cut since 2012 will aid the property market and shore up lenders, after the biggest jump in bad loans in nine years.
New-home prices dropped in October in 67 of 70 major cities and housing sales slumped 10 percent in the first 10 months from a year earlier, official data showed this week. Bad loans surged 10 percent last quarter, the most since 2005. Five-year AAA bank bonds have slumped in the past week, widening their yield spread over the sovereign to 1.17 percentage points from a five-year low of 1 percentage point on Nov. 14.
Bad debts in China are well underestimated because authorities persist in propping up weak companies and bailing out local investors, according to DAC Management LLC.
The Chicago-based asset management and advisory firm, which focuses on distressed credit and special situations in China, says the worst is yet to come, and that means lots of opportunities for the world’s biggest distressed debt traders.
A difficult operating environment isn’t stopping non-bank lenders and more informal banking channels making their mark in the People’s Republic of China.
Some interesting insights into ‘shadow’ banking emerged from PDI’s Corporate Debt in China event in Hong Kong last week.
A report from S&P in June set alarm bells ringing when it said corporate debt sourced from China’s shadow banking sector had reached between $4 and $5 trillion in 2013, or roughly 30 percent of the $14.2 trillion total.
Platinum Sponsor DAC Management will once again sponsor the Lao Men’s National 15s Team in their upcoming Asian 5 Nations Division 3 East competition to be held in Vientiane, Laos. Laos will be hosting China, Guam, and Indonesia in central Vientiane on 29 and 31 May.
The Men’s National Team hopes to build on last year’s gritty debuts against Pakistan and Uzbekistan in Division 4 in Dubai. Their progress thus far has been made possible through the generous support of DAC Management. Thirteen of the National Team players are fresh off their highest finish yet in the Altus Kowloon RugbyFest Tournament in Hong Kong this past March. DAC made the Hong Kong tour possible for a third consecutive year. DAC Management-sponsored Lao Nagas returned home from the prestigious Hong Kong 7s grounds equipped with a stronger sense of confidence and newfound knowledge and experiences, which will be crucial to their success in the upcoming Asian 5 Nations Competition.
Foreign and domestic investors are preparing to pounce on bad debts held by Chinese banks—a potentially lucrative but risky area that has disappointed investors in the past.
Specialist investors are starting to raise funds on the expectation that the country’s lenders, under pressure to improve their balance sheets, will soon sell nonperforming loans.
China has a cycle all of its own, commented panelists at the AsianInvestor and FinanceAsia Asia-Pacific Debt Investor Forum in Hong Kong last week.
Lending in China has increased in the past 12 months, as banks have deployed more money on macro government policy than on fundamental ratio-based lending. Assuming that splurge in lending will eventually result in a number of non-performing loans, they will in due course be transferred to distressed investors.
Taiyuan is only a few hundred kilometres south of bustling, modern Beijing, but could be a world away. Decaying grey and brown buildings and yellow-brown wheat fields dominate the Shanxi capital’s landscape. From the air, the city resembles a mouthful of rotting teeth.
Because Shanxi produces most of China’s coal, Taiyuan is also the mainland’s most polluted city. Coal plants belch out giant, cauliflower-shaped soot clouds. The wide grey roads melt seamlessly into the bleak grey sky. Miners in Mao caps and drab, grey clothing bicycle slowly to work and home, seemingly unexcited about reaching either destination.
This is the place Matthew Nelson, a manager at hedge fund DAC Management, left Wall Street for.
A Hong Kong hedge fund, betting that last year’s bank lending spree on the mainland will result in thousands of businesses failing to repay loans, is raising US$500 million to snap up China’s corporate carrion cheap.
It is the biggest fund-raising embarked on by DAC Management, which is understood to be the largest foreign buyer of mainland non-performing loans.
Fund managers at the AsianInvestor/FinanceAsia Distressed and Troubled Asset Investing Summit held in Tokyo last week were thinking about their rights. More specifically, had their legal trading rights improved in Asia during the past 10 years, and what can they do about it?
Their interrogator was FinanceAsia editor Laura Wozniak, and her subjects’ attention alighted primarily on China. The panel discussed what might emerge in the way of distress from the Rmb10 trillion ($1.5 trillion) of recent fresh lending in the country.
Asia-Pacific sovereign wealth funds (SWFs), which have made some disastrous bets on western financial companies, are now diversifying into the riskier arena of distressed asset investments.
From non-performing loans in South Korea to busted U.S. property projects, distressed assets are piling up globally and the sovereign funds are looking to swoop in at a time many western investment banks and hedge funds have been decimated by the financial crisis.